Can Teck Resources fend off attacks from activist funds

Eric Reguly, European Bureau Chief
Published May 8, 2020
. . . . . . .

Teck Resources, one of the last Canadian-controlled mining companies of any size, has been in the news a lot in recent months – for all the wrong reasons.

In December, the Vancouver company emerged as one of the bogeymen at the climate change summit in Madrid, where Canadian Environment Minister Jonathan Wilkinson was peppered with questions about Teck’s proposed $20-billion Frontier oil sands projects in northern Alberta. If cabinet were to approve the project, his climate change plan would lose all credibility on the world stage. But Teck killed Frontier in February, sparing cabinet from having to make a no-win decision.

Now, the company is under attack by at small but powerful gaggle of international activist funds that are not happy with their investment returns. The two creating the most fuss are Tribeca Investment Partners of Australia, which in 2017 urged mighty BHP Group Ltd. to unload its U.S. oil and gas shale assets (it did), and Palm Beach-based Impala Asset Management.

In short, they want chief executive Don Lindsay, the former investment banker who has led Teck for 15 years, replaced. And they want the company to blow out its oil business.

Mr. Lindsay is indeed under pressure. Teck’s share price is down 58 per cent over the past year, giving the company a market value of just $6.5-billion.

The question is whether Norm Keevil, the mining pioneer who is now Teck’s chairman emeritus after long stints as CEO and chairman, will continue to use his family’s lock on the Class A shares, which have 100 times the voting power of the B shares, to protect Mr. Lindsay. Many years of shabby share-price performance say he should not.

On Bay Street, Mr. Keevil used to be known as “the lesser of the two Keevils,” a mocking reference to him and his father, Norm Sr., who founded the company. In truth, it was Junior who took Teck into the big leagues, creating a resources powerhouse with a market value of $15-billion by 2015, with ambitions to double its size. He grew Teck knowing his A shares would make the company takeover-proof – he could do whatever he wanted.

In 2005, he recruited Mr. Lindsay, who pushed the copper and zinc producer heavily into coal and oil, making Teck a diversified mining and energy group – a small version, in effect, of BHP, the Anglo-Australian metals and oil giant. Some of the investments worked out well, such as the Antamina copper and zinc mine in the Andes, but a few biggies did not.

Teck’s metallurgical (coking) coal assets are considered world class, but the lunge into coal in 2008, through the purchase of the Fording Canadian Coal Trust, now looks rather expensive. Fording cost $14-billion, which is more than twice Teck’s current market value. The expansion of the Neptune bulk terminal, in North Vancouver, has gone hundreds of millions of dollars over budget.

The oil foray has been a disaster. Since 2005, Teck has spent about $6-billion on the Fort Hills oil sands project, where it is a minority partner. The return on investment has been negligible.

The enormous Frontier project was not only ill-timed, given sagging oil prices since 2014, but also came when all industrial companies were under enormous pressure to clean up their acts as the global warming crisis intensified. Teck wrote down the carrying value of Frontier by $1.1-billion when the company killed the project three months ago.

By the calculations of Impala and Tribeca, based on equity prices supplied by Bloomberg, Teck has been a massive under-performer, both in relation to its peer group and to the broader market. In an April 30 letter to Teck’s directors, Tribeca said that, since 2005, the return to shareholders, including share buybacks and dividends, has been minus 39 per cent, even though copper, zinc and metallurgical coal prices are up substantially over that period. Over the same time, the total return of the Standard & Poor’s 500 Index has been more than 200 per cent.

Teck begs to differ. By its calculations, Teck has actually been an outperformer. In a “Background information” sheet given to The Globe and Mail earlier this week, Teck said its return from the beginning of Mr. Lindsay’s arrival to Dec. 31, 2018, has been 84 per cent compared with 78 per cent for Teck’s peer group.

How can that be? There are three problems with Teck’s calculation.

The first is the arbitrary cutoff date – the end of 2018. Since then, Teck shares have fallen to about $12.50 from $29. The second is the arbitrary selection of the peer group, which Teck says was calculated “using the weighted average (based on annual revenue contribution by division) median performance" of pure-play metals companies.

The inclusion of some of those companies, but not others, is a mystery. Yes, Peabody Energy Corporation is a coal company, and Teck has coal. But Peabody largely produces thermal coal, and prices for that have fared worse than those for the metallurgical coal Teck produces. Comparing the two companies is not apples to apples.

The third problem is that the Teck-chosen peer group includes no diversified resources companies, such as BHP, Rio Tinto Ltd., Anglo American PLC and Glencore PLC. Teck is diversified, but its investor relations team says it’s not fair to compare the company’s performance with rivals whose assets include iron ore, a product that has produced stellar returns in recent years.

All diversified resources companies have different mixes, however, so none is directly comparable. Even so, they represent a peer group and analysts measure Teck’s performance against them. Teck does, too, in its annual proxy statements, in which it compares executive compensation packages.

Moreover, Teck once made an investment in an Australian iron ore company, Fortescue, that would have lucrative. But Mr. Lindsay ditched that investment in 2012.

Mr. Keevil cannot be happy with Teck’s poor performance. But will he replace the senior management team and push the company in a new strategic direction by, say, selling the oil business and possibly separating coal operations from base metals?

That seems unlikely, at least in the near term. In an e-mail to The Globe, he said “I’m as concerned about the company as any activist, likely even more so having been part of the team that built it. I’ve been concerned about the company every day for most of the last 50 years." But in a subsequent e-mail, he added, “this is not the time for us to be distracted while we manage through the pandemic. It’s time to have all hands on deck, pulling in the same direction.”

Mr. Lindsay’s job seems secure for the moment. Mr. Keevil apparently has high tolerance for pain.

. . . . . . .
Apologies to Mr. Reguly and the Globe for probably transgressing their copyright.